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1) What was the ethical misconduct in the WorldCom case? 2) What management behaviors led to the financial fraud that was committed? 3) What would you do if you were faced with a similar situation?

1) What was the ethical misconduct in the WorldCom case? 2) What management behaviors led to the financial fraud that was committed? 3) What would you do if you were faced with a similar situation?

Understanding Business
Understanding Business
12th Edition
ISBN:9781259929434
Author:William Nickels
Publisher:William Nickels
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
Section: Chapter Questions
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1) What was the ethical misconduct in the WorldCom case? 2) What management behaviors led to the financial fraud that was committed? 3) What would you do if you were faced with a similar situation?
In her book, Ms. Cooper outlined the following three (3) parts of a fraud triangle: 1) pressure, 2) rationalization, and 3) opportunity. She explained in the example of WorldCom that pressure from Wall Street analysts and investors influenced executives’ faulty decision making. They were expected to maintain a high growth rate even though the growth was due to their acquisitions of telecom companies. The CEO Bernie Ebbers put pressure on CFO Sullivan and the accounting department to “hit the numbers” (Taylor, 2009). The second piece of the fraud triangle, “rationalization,” occurred at WorldCom when the CFO Sullivan convinced the accounting personnel to participate in the wrongdoing and claimed it was a one-time event (Taylor, 2009). According to Ms. Cooper, the employees continued to participate in the fraud because they feared being fired. According to current management literature by Solas (2019), research on followers and “acolytes” or “bystanders” who witness wrongdoing stay silent whether or not they benefit from supporting their leaders. Previous researchers in his study claim that “...some, if not all of the ethical problems in corporate capitalism revolve around a failure or leadership” (Solas, 2019). Executives at WorldCom did the same thing by condoning misconduct. The third part of the fraud triangle, “opportunity” refers to the accounting information systems that were key to committing the fraud and its discovery at WorldCom (Taylor, 2019). Weak internal control systems and WorldCom’s new acquisitions resulted in many different accounts receivable systems and billing systems. The fraudsters took advantage of the weak internal control and document system. Cooper explains that during her audit work she found questionable journal entries for capital expenditures. The internal auditors were able to access only the balance sheet side of the transaction. The fraudsters knew the internal auditors had limited IT access and took advantage of this. Ms. Cooper enlisted an IT department ally to run a Beta version of the transactions at night to allow them to locate the data that she needed to present to the Audit Committee chair. The author reports that her audit group constantly gave warnings to management about the dangers of a weak internal control system (Taylor, 2019).
Transcribed Image Text:In her book, Ms. Cooper outlined the following three (3) parts of a fraud triangle: 1) pressure, 2) rationalization, and 3) opportunity. She explained in the example of WorldCom that pressure from Wall Street analysts and investors influenced executives’ faulty decision making. They were expected to maintain a high growth rate even though the growth was due to their acquisitions of telecom companies. The CEO Bernie Ebbers put pressure on CFO Sullivan and the accounting department to “hit the numbers” (Taylor, 2009). The second piece of the fraud triangle, “rationalization,” occurred at WorldCom when the CFO Sullivan convinced the accounting personnel to participate in the wrongdoing and claimed it was a one-time event (Taylor, 2009). According to Ms. Cooper, the employees continued to participate in the fraud because they feared being fired. According to current management literature by Solas (2019), research on followers and “acolytes” or “bystanders” who witness wrongdoing stay silent whether or not they benefit from supporting their leaders. Previous researchers in his study claim that “...some, if not all of the ethical problems in corporate capitalism revolve around a failure or leadership” (Solas, 2019). Executives at WorldCom did the same thing by condoning misconduct. The third part of the fraud triangle, “opportunity” refers to the accounting information systems that were key to committing the fraud and its discovery at WorldCom (Taylor, 2019). Weak internal control systems and WorldCom’s new acquisitions resulted in many different accounts receivable systems and billing systems. The fraudsters took advantage of the weak internal control and document system. Cooper explains that during her audit work she found questionable journal entries for capital expenditures. The internal auditors were able to access only the balance sheet side of the transaction. The fraudsters knew the internal auditors had limited IT access and took advantage of this. Ms. Cooper enlisted an IT department ally to run a Beta version of the transactions at night to allow them to locate the data that she needed to present to the Audit Committee chair. The author reports that her audit group constantly gave warnings to management about the dangers of a weak internal control system (Taylor, 2019).
**Title: Understanding the Role of Internal Audits and Whistleblowing in Corporate Governance** **Introduction:** The passage highlights the critical role of internal audit in identifying and reporting fraudulent accounting activities within corporations. It specifically discusses the contributions of Cynthia Cooper, whose efforts in exposing financial misconduct at WorldCom led to significant revelations and legal consequences. **Key Insights:** 1. **Internal Audit and Management:** - Internal audit groups play a vital role in warning management about potential weaknesses in internal controls (Taylor, 2019). - Conflicts between internal audit departments and management can hinder effective oversight, as illustrated by CFO Scott Sullivan's attempt to limit internal audit activities (Taylor, 2019). 2. **Fraud Detection:** - Internal auditors may face challenges, such as restricted access to crucial documents, which impede their ability to properly investigate and report issues. - Cooperation with IT departments can facilitate access to necessary data, as demonstrated by Cynthia Cooper’s efforts to compile evidence for the Audit Committee chair. 3. **Whistleblowing:** - Cynthia Cooper's findings on fraudulent activities were eventually acknowledged by the Audit Committee, marking a pivotal moment in addressing corporate fraud. - The WorldCom case, which saw cooperation between management and external auditors, serves as a significant example of how whistleblowing can bring about corporate accountability. 4. **Educational Value:** - Cynthia Cooper's book, *Extraordinary Circumstances: The Journey of a Corporate Whistleblower* (2008), provides insights into her experience and the broader challenges whistleblowers face. - The book is a valuable resource for students studying business ethics, highlighting the importance of integrity and the impact of individual actions in addressing corporate misconduct. 5. **Learning Outcomes:** - Students can gain a deeper understanding of corporate accounting fraud. - The study of Cooper’s experiences aids in comprehending the mechanisms through which fraudulent activities can be detected and deterred. - Future business leaders can learn the importance of ethical decision-making and the potential ramifications of whistleblowing. **Conclusion:** Cynthia Cooper’s work exemplifies the profound impact individuals can have in promoting ethical corporate practices. Her story underscores the necessity for strong internal audit functions and the importance of supporting whistleblowers in ensuring corporate transparency and accountability.
Transcribed Image Text:**Title: Understanding the Role of Internal Audits and Whistleblowing in Corporate Governance** **Introduction:** The passage highlights the critical role of internal audit in identifying and reporting fraudulent accounting activities within corporations. It specifically discusses the contributions of Cynthia Cooper, whose efforts in exposing financial misconduct at WorldCom led to significant revelations and legal consequences. **Key Insights:** 1. **Internal Audit and Management:** - Internal audit groups play a vital role in warning management about potential weaknesses in internal controls (Taylor, 2019). - Conflicts between internal audit departments and management can hinder effective oversight, as illustrated by CFO Scott Sullivan's attempt to limit internal audit activities (Taylor, 2019). 2. **Fraud Detection:** - Internal auditors may face challenges, such as restricted access to crucial documents, which impede their ability to properly investigate and report issues. - Cooperation with IT departments can facilitate access to necessary data, as demonstrated by Cynthia Cooper’s efforts to compile evidence for the Audit Committee chair. 3. **Whistleblowing:** - Cynthia Cooper's findings on fraudulent activities were eventually acknowledged by the Audit Committee, marking a pivotal moment in addressing corporate fraud. - The WorldCom case, which saw cooperation between management and external auditors, serves as a significant example of how whistleblowing can bring about corporate accountability. 4. **Educational Value:** - Cynthia Cooper's book, *Extraordinary Circumstances: The Journey of a Corporate Whistleblower* (2008), provides insights into her experience and the broader challenges whistleblowers face. - The book is a valuable resource for students studying business ethics, highlighting the importance of integrity and the impact of individual actions in addressing corporate misconduct. 5. **Learning Outcomes:** - Students can gain a deeper understanding of corporate accounting fraud. - The study of Cooper’s experiences aids in comprehending the mechanisms through which fraudulent activities can be detected and deterred. - Future business leaders can learn the importance of ethical decision-making and the potential ramifications of whistleblowing. **Conclusion:** Cynthia Cooper’s work exemplifies the profound impact individuals can have in promoting ethical corporate practices. Her story underscores the necessity for strong internal audit functions and the importance of supporting whistleblowers in ensuring corporate transparency and accountability.
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